Owner-occupant homebuyers don’t often think of themselves as investors trying to make money, so they pay full price for a home and take out a government-insured loan for the purchase, without giving it much thought. Most of their focus is on choosing the right neighborhood or the right style and location. These are fundamentals that are more important to them than money. In a way, they assume that their house will eventually increase in value.

The other sector is the 20% of buyers and sellers that make up the investment market. These are sellers who sell at a discount and buyers who buy at a discount. These buyers and sellers are consciously trying to make a profit and their goal is to make money or build wealth.

But I believe that all homebuyers are real estate investors, for the simple reason that no one buys a home with the intention of losing money. But with government-insured loans, this is usually what happens.

As a result of ongoing government intervention since the great depression of the 1930s, today’s mortgage industry has become a half-private, half-public money machine that has become a monster.

While government-insured loans like FHA, VA, and USDA were created to help low-income buyers afford a home mortgage, the result has been very expensive loans that will more than double the costs of a home loan.

Note that I said the cost of the loan. Not the cost of the house. The value of the property is set. It’s the loan costs that go up. And few loans are more expensive than government-insured loans that are supposedly designed to help low-income buyers.

Most retail buyers who use a traditional FHA (government-insured) mortgage to purchase a home don’t even realize the true costs over time. Traditional mortgage loans can be very expensive. In the traditional world, the actual cost is more than double the advertised cost of the house.

Here’s a quick example: the FHA loan

Probably 90% of all ordinary home sales are financed this way. You borrow $95,000 to buy a house that is appraised at $100,000. Bring $3,000 to closing to pay the loan origination fee. Bring $5,000 to closing for your down payment as required by the FHA. Bring an extra $3,000 to closing to cover everything else like attorney fees, courier fees, processing fees, appraisal fees, taxes, insurance, plus fees and… idea.

So now you “own” a house with the following general numbers:

• Appraised Value: $100,000
• Initial payment $5000
• Loan amount $95,000
• Fees and costs: $6000

Private Mortgage Insurance, (PMI), currently calculated as follows: 0.078% /12 of the loan amount. This is what it looks like: $95,000 X.0078 = $741 divided by 12 = $61.75 per month.

This “private mortgage insurance” is the key to your “government insured” loan. The premium is added to your monthly mortgage payment. You will pay this insurance premium every month for about 20 years. So your $95,000 loan will cost an additional $14,820.00 for mortgage insurance.

Mortgage folks will be quick to point out that PMI is what allows low-income buyers to get a home loan with a 5% down payment. Before PMI came along, the required down payment was 20%. We have a $100,000 house, this would be a $20,000 down payment.

Most people no longer have 20% down payments, so PMI was invented to allow people with lower down payments to own homes. It serves its purpose, but most buyers are generally unaware of this significant cost.

There are so many costs associated with traditional home loans that, along with tax and insurance burdens, home ownership is becoming less and less affordable, despite “modern” financial tools like PMI.

So back to our $100,000 house… what does this deal look like? Are we gaining equity and creating savings if we buy this house with a “traditional” mortgage?

Doing a quick calculation on an ordinary mortgage calculator, I came up with the following:

• A $100,000 home, an FHA loan with a down payment of $5,000, a loan amount of $95,000. 30-year fixed interest rate of 6% means you will pay:
• amount of $95,000 borrowed. (important)
• $110,046.28 in INTEREST
• PMI insurance of $14,820 (added to monthly payment)

So your small $95,000 mortgage has turned into an expensive alligator that will actually cost you a minimum of $219,866.28!

So, you start out as a new homeowner with $6,000 in the hole, and even if your house doubles in value over the next 30 years, you’ll lose $20,000!

And we haven’t even discussed the costs of property taxes, sure Y Maintenance in process.

Buying a home the traditional way is very expensive and rarely leaves the buyer with any real value. Most people aren’t actually making a real profit on the sale of their home, they’re simply recouping expenses already paid when they sell for a “profit.”

Whether you’re buying your first home or your 50th, you should always think like a real estate investor. Search for the best deals in your desired area. Negotiate your purchase price and buy below what you think you can afford, then prepay part of the principal each month from day one to further lower your costs.

Better yet, find sellers who are willing to finance for you and avoid costly loans altogether!